Are Microsoft’s Android Patents Worth Anything?

Following a recent move by the Chinese Government that saw it divulge details of Microsoft's (NASDAQ: MSFT) long-held secret regarding its 310 Android patents, M-Cam, a global financial institution that advises companies and investors on different matters pertaining to finance and asset allocation, including underwriting intangible assets(IA) and intellectual property(IP), has studied the patents and released its own findings. The Chinese Government revealed details of Microsoft's Android portfolio as part of its review of the company's $7.2 billion purchase of Nokia's (NYSE: NOK) handset division.

M-Cam specifically looked at the question of whether Microsoft actually owns proprietary rights to Android OS to determine whether the Redmond giant was unfairly taxing Android device makers. The company also scored the patents using its internal commercial assets underwriting systems to find their commercial strength and transferability, and came up with some interesting findings.

M-Cam findingsAccording to the M-Cam report, only 21% of the Microsoft's 310 Android patents are commercially viable, while the rest are of a non-commercial nature. Many of the patents are either expired or abandoned, meaning they essentially exist in a ''Freedom to Operate'' space and are already in the public domain. This finding casts serious doubts on the overall viability of Microsoft's licensing package.

M-Cam findings on Microsoft's Android patents

Source:M-Cam

But, perhaps the most damning part of the report was the revelation that more than 40 of the commercially viable patents had been preceded by other companies that Microsoft had not cited. Here is a rundown of the notable cases:

Alcatel-Lucent-11 patents

International Business Machines-7 patents

Intel Corporation-3 patents

Oracle-3 patents

Apple-2 patents

The significance of M-Cam findingsThe M-Cam report concluded that if Microsoft's Android smartphone patents may not be the standard-essential patents(SEP) that Microsoft claims they are. In other words, Microsoft may no longer wield the immense power it used on Android device makers to demand patent fees from them.

Microsoft has signed 20 patent deals with Android device manufacturers to-date. The company inked a patent deal with Samsung back in 2011 that licensed Samsung to use certain undisclosed Microsoft Android patents on its smartphones and tablets.

Although Microsoft does not normally reveal how much it makes from Android patents, a Nomura analyst provided an estimate of $5-$16 per Android device sold, amounting to $2 billion every year. That's hardly pocket change. In fact, the amount is about five times what Microsoft makes from sales of its Windows Phones.

Although what Microsoft ekes out of every Android device sold may not look like much, Android device makers may not necessarily share that sentiment. Profit margins on Android devices are notoriously thin, and it's widely claimed that of all major Android vendors, only Samsung makes any kind of meaningful profit. These Android vendors would quite naturally be keen to cut costs as much as possible and retain a bigger percentage of their device sales.

Only Motorola Mobility has ever successfully challenged Microsoft in court successfully regarding its patent demands. All other companies have usually elected to pay up whatever Microsoft was demanding, due to the heavy cost of litigation. Patent trolls cost the U.S. economy $30 billion every year.

It's now extremely likely that other Android smartphone vendors will now be more willing to take on Microsoft in court whenever Microsoft demands patent fees from them, instead of simply putting up and paying up. With the Android Patent information now in the public domain, these vendors, and their army of lawyers, will no doubt take time to scrutinize the patents for any cracks and loopholes they can use to evade paying up. Motorola's unprecedented success will no doubt spur them along too.

What will Microsoft now do?Microsoft normally uses profits from its lucrative Android portfolio to support its loss-making divisions. If Microsoft ends up losing a significant portion of its Android patent fess, it might decide to jettison one or both of its top loss-making products: Surface Tablets and/ or Xbox.

It would perhaps make more business sense for Microsoft to lose Xbox and keep the Surface Tablet. The company loses more than $1 billion on Xbox sales every year, whereas the company will lose approximately $400 million on Surface Tablet sales in fiscal 2014. The Surface Tablet also helps users connect to Microsoft's cloud, which is one the company's biggest goals at the moment. Although there are rumors circulating that Microsoft might replace the Lumia Brand with the Surface Brand, this might not necessarily mean that the company is planning to do away with the tablet.

Judging by recent company developments, don't count on Xbox going anywhere anytime soon, either. Microsoft chief executive Satya Nadella recently penned a missive to its employees dismissing widely held speculations that the company might soon sell the Xbox division. If anything, the company is working on strengthening the brand.

ConclusionHow the Microsoft Android patents circus eventually pan out remains to be seen. But, in the final analysis, although the loss of the Android patent fees would be regrettable, it would do little to harm the company, or its image, since it's not part of its core business. In any case, there is a good chance that Microsoft will retain a significant portion of the patent fees even after Android vendors challenge it in court.

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Joseph Gacinga has no position in any stocks mentioned. The Motley Fool recommends Apple and Intel. The Motley Fool owns shares of Apple, Intel, International Business Machines, Microsoft, and Oracle. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Their analysis found "With a typical hit rate of approximately 5% to 10% for what is likely a hand selected list of patents, it is probable that many of these areas could be shown to have evidence of use, giving a broad coverage of features that are important to consumers. From a top level analysis, there seems to be a solid technology and patent base to support a licensing campaign."